Scandinavia doesn't do it. The Germans don't do it. The French don't do it. Not even the Americans do it. Britain is almost alone among rich countries in its willingness to pitch its workers into poverty-level incomes when they lose their jobs.

Everyone else pays the unemployed a percentage of their last salary, in an explicit recognition that there should be a connection between what people have contributed in the past, and what they get back at a time of need. We have almost severed that link, and it means that our welfare system is fundamentally unfair.

Penny Hughes (not her real name), a working mother in the Midlands whose husband has been unemployed three times, is bitter about how welfare is distributed. Her husband has been working for 30 years and she, with breaks for looking after their three children, for more than 25. In the last decade her partner has never had a day off sick. Their national insurance payments add up to tens of thousands of pounds. Each time he has lost his job it has been only because his company has been contracting in a recession. Every time, even though his unemployment has been for short periods, it has catapulted them into financial disaster.

Because the insurance element of our national insurance scheme is so minimal, an unemployed man whose partner earns a reasonable wage only qualifies for six months of jobseeker's allowance, at about £65 a week. But the sudden loss of more than half the family's income has always been impossible to cope with. Hughes's savings have always gone within six weeks.

"Losing your job throws you into absolute chaos," says Hughes. "The whole family is under threat. You have to stop everything – the children's music lessons, swimming, going out, driving the car. We went into arrears on the mortgage because we were left with less than £100 a week to spend on everything: food, bills, shoes, school trips. It stops you living an ordinary life. It's devastating, and what you end up owing puts you behind for years. It makes me furious. What does the system do for us?"

This family's situation is common. Most Britons don't have the resources to survive unemployment on their own. The Resolution Foundation, an independent research and policy organisation, calculates that the majority of families on below-average earnings have less than a month's savings in the bank, making then very vulnerable when they stop earning. Yet somehow, unlike other nations, we have been willing to tolerate a welfare system that doesn't give working people much of a cushion in a crisis.

Tim Horton, research director of the Fabian Society, thinks the crucial difference between us and comparable nations is that our system developed from the poor laws of the 16th and 17th century. We saw welfare as taking care of the destitute at the bottom, and our attitude towards it has always been slightly begrudging. We see it as something we give to others, not something we may need and want to invest in ourselves.

In most other western countries, he argues, the roots of welfare lie in the 19th century, when industrialisation created mass insecurity for everyone, including the middle classes. In those countries, welfare has been about including everybody in an insurance-based system where it is seen as obvious that individuals' returns should be based on what they have paid in. In much of continental Europe, and even in most US states, the newly unemployed can expect to be paid between 30% and 75% of their last salary for up to two years. That sense of paying for your own security has made those schemes popular and generous. They are widely seen as fair.

It might look logical, particularly when money is tight, to do as Britain does and focus benefits only on the very poor and those most in need. The evidence is that acting this way is bad for the economy, because the unemployed have so little to spend; bad for individuals, who are left feeling so insecure; and bad even for the poor, who end up being awarded very little. The British welfare system is run almost on the basis of altruism. It expects those on average and high incomes to pay out for benefits that they will never receive themselves. That doesn't go with the grain of human nature. We are co-operative creatures, and we expect reciprocity from others.

As welfare has become focused on the needy, we have become less generous towards its recipients. Benefits are now set at well below poverty levels, and most of us no longer care. Whereas in 1985 42% of us thought it was definitely the government's responsibility to provide a decent standard of living for the unemployed, by 2006 only 10% thought that true.

If we want to reverse this vicious cycle we should reform our approach, and give greater rewards to those who have paid in. We might, for instance, entitle those with five years in work to 80% of their last salary for a maximum of six months over a five-year period. Those who want to participate might have to pay an extra 1% of their salary into a genuine state insurance fund – though noone is currently sure of the precise cost.

A cushion like this would make a real difference to people's lives. The difficulty is that no government ever sees a good moment to go through the cost and chaos of introducing it. A former Blair adviser told me that a similar proposal never became a reality because in good times the issue recedes, and in bad times no one can afford it. The Tories have shown that they are serious in thinking radically about welfare. This should be part of their revolution.